Commission demands ‘credible response’ from Italy to reduce debt

“Our political message is very clear: Italy needs to continue reducing its public debt,” European Commission vice-president Valdis Dombrovskis said on Wednesday (23 May). [European Commission]

The European Commission on Wednesday (23 May) approved Italy’s efforts to balance its public accounts but asked the new government for a “credible response” in order to further reduce its immense public debt.

The EU executive presented its verdict on member state’s national budgets and economic reform programmes just as Italy was putting a new government in place after an inconclusive general election on 4 March.

The Commission opinion on Italy and other EU member states is part of the “European Semester” of economic policy coordination. It came came shortly after the coalition agreement between the Five Star Movement and the League was sealed in Rome but before the confirmation of Giuseppe Conte as the new prime minister.

The Italian government’s promises of increasing expenditure, reducing taxes and renegotiating EU treaties have sparked concerns on European markets.

But the Commission held off from sending strong warnings to Rome at this stage.

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The anti-establishment 5-Star Movement and far-right Northern League plan to ask the European Central Bank to forgive €250 billion of Italian debt, according to a draft of a coalition programme the parties are working on.

“The Commission cannot and should not comment on announcements. It takes positions on actions, on budgets and laws,” said Commissioner for Economic Affairs Pierre Moscovici.

“The important thing is to respect democratic legitimacy and process. It is appropriate to wait for the end of the process of appointing an Italian government,” he told reporters during the presentation of the opinions.

In its report on Italy, the EU executive concluded that the previous government fulfilled the EU’s fiscal rules, as it met the agreed path to reducing public debt.

Italy’s sovereign debt is expected to decrease from 131.8% of GDP in 2017 to 130.7% in 2018, and 129.77% in 2019. The EU’s average debt in 2017 was 81.6% of GDP.

“Our assessment shows a broad compliance with the Stability and Growth Pact,” Commission Vice-President for the Euro Valdis Dombrovskis revealed during the press conference.

How did EU-founding member Italy go Eurosceptic?

All eyes are on Italy as the far-right League and rebellious Five Star Movement close in on power, ringing alarm bells in Brussels as the country inches towards becoming the first EU founding member to have a euro-sceptic government.

Clear message

But both Moscovici and Dombrovskis highlighted Italy’s huge debt problem, which has proved to be a permanent concern for Brussels.

“Our political message is very clear: Italy needs to continue reducing its public debt,” Dombrovskis said.

Addressing the debt issue is “very important” for the future of Italian citizens, Moscovici insisted, adding that “we need a credible response to this problem”.

Although Five Star’s Luigi Di Maio and the League’s Matteo Salvini erased some of the most controversial proposals in their agreement, including the possibility of exiting the eurozone, they warned that they would not respect the EU’s fiscal rules.

In addition, they were considering appointing a Eurosceptic (Paolo Savona) as finance minister.

An Italian job to shield the euro

Market pressure, the strong hand of EU institutions and the limits of power will determine how far the new Italian government will go in shaking up the eurozone’s status quo.

But the Commission was not ready to pick a fight yet and opted for a conciliatory tone.

As one of the founding members of the EU and the eurozone’s third largest economy, Moscovici stressed that Italy should balance its public accounts “obviously” within the European framework.

The EU institutions are aware that the process to rein in Rome would be riskier than with Greece’s Alexis Tsipras, as Italy holds both the largest amount of debt (€2.3 trillion) and bad loans (€173 billion) in the eurozone, sufficient to crack the whole region.

Contagion

The political situation in Italy is starting to affect other eurozone countries that remain vulnerable despite years of expansion, such as Spain and Portugal.

Moscovici: Italy, Portugal, Spain fiscal progress 'good news'

Portugal, Italy and Spain became yesterday (22 May) illustrative examples of the new period Europe enjoys. The executive congratulated Lisbon and Madrid for turning their economies upside down, just one year after they became the first countries that breached the fiscal rules, while it gave its blessing to Rome’s adjustments, one of the eurozone’s troublemakers.

In its verdict on Spain, the Commission noted that “the large stocks of external and internal debt, both public and private, in a context of high unemployment, continue to constitute vulnerabilities with crossborder relevance”.

Spain, whose debt stands at 98% of GDP, is the only country that remains under the excessive deficit procedure. The country is also finalising the cleaning-up of its banking system after receiving €40 billion in 2012 from the member states.

In the case of Portugal, the EU executive said that “the large stocks of net external liabilities, private and public debt, and a high proportion of non-performing loans constitute vulnerabilities in a context of low productivity growth”.

But Italy could also complicate the discussions on banking union progress, as EU leaders expected to achieve concrete results during the European Council in late June.

The “instability” in Italy could become an “obstacle” to advancing the banking union dossier, one Spanish official admitted.

Europe’s reform push faces reality check

The impulse to bolster the eurozone, sparked by Emmanuel Macron’s victory in France almost one year ago, is losing its vigour as political instability persists and a group of countries have solidified their opposition to bold changes.

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